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Australian Services Roundtable

Senator Kim Carr

Minister for Innovation, Industry,

Science and Research

10 June 2009

Eureka89

7 Riverside Quay

Southbank, Victoria

Proudly sponsored by

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You are all familiar with the figures.

The service industries employed 85 per cent of the

workforce in the year to February.

They generated 76 per cent of Australia’s industry value

added in 2008.

The Australian Government is also very conscious of

these statistics.

That’s why we take the service industries so seriously –

why, for example, we appointed Australia’s first ever

minister for the service economy, Dr Craig Emerson.

Craig also picked up competition policy and consumer

affairs in the weekend’s reshuffle.

These new responsibilities will dovetail perfectly with

the work he is doing with this sector, which will remain

core business.

Service exports

We understand very well how important service

industries are to Australia, but we are also aware that

there are still challenges to be overcome.

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For example, while this sector represents three-quarters

of our economy, it accounts for less than one-quarter of

our exports – just 22 per cent in 2007-08.

As the Australian Services Roundtable put it to the

Mortimer review last year “services exports have far

from reached their full potential”.

Most of this group’s specific recommendations to

Mortimer are matters for Simon Crean, but its

submission also makes the more general point that we

can build global competitiveness by:

increasing innovation

improving regulation

developing skills

and investing in infrastructure – especially

“knowledge economy infrastructure”.

These are matters for the whole government, and the

government is addressing them in a service economy

strategy designed to make the service industries more

productive and internationally competitive.

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Among other things, we have accepted most of the

recommendations in the House of Representatives

committee report on service exports, Servicing our

Future, and we are now acting on them.

The National Long-Term Tourism Strategy is one

example.

Another is the work being done on branding options by

Austrade, Tourism Australia, and others – including my

department.

In fact, my portfolio has an interest in all four areas the

Australian Services Roundtable says we need to work

on if we want to be a global player – not just in

innovation, but also in the skills, infrastructure, and

regulation to support it.

Patent reform

Take regulation.

One of the most important regulatory reforms we are

engaged in at the moment is IP Australia’s overhaul of

the Patents Act.

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Last year’s Review of the National Innovation System

recommended that:

“Patent law should be reviewed to ensure that

the inventive steps required to qualify for

patents are considerable, and that the resulting

patents are well defined, so as to minimise

litigation and maximise the scope for

subsequent innovators.”

Powering Ideas, the government’s innovation agenda

for the next decade, commits us to “consider options for

reforming the Australian patent system to increase

innovation, investment and trade”.

IP Australia has already embarked on that process by

initiating consultations on two proposed reforms.

The first is to include a statutory exemption in the Act

for research and experimentation.

This would enable people to investigate patented

inventions with a view to figuring out how they work,

improving them, testing hypotheses, discovering new

properties and so on – all without infringing the patent.

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The exemption would only be for research, and would

not extend to commercial exploitation.

There is already evidence that the proliferation of

patents is stifling innovation.

For some patent holders, this is the whole point – why

else would you file 1,300 patents across the European

Union for a single drug, as one company has done?

(Guardian, 28 November 2008)

The proposed exemption would circumvent this kind of

gaming and safeguard freedom of inquiry, while still

honouring the commercial rights of intellectual property

owners.

The second area targetted for reform is patentability

standards.

These are lower in Australia than in many other

countries – including the countries we do most of our

trade with.

We allow patent applicants to describe their inventions

less fully and we grant patents for what are by

international standards obvious and trivial inventive

steps.

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The net effect is to skew the patent system in favour of

intellectual property owners at the expense of

innovation and competition.

IP Australia is proposing a series of amendments to the

Patents Act and regulations with a view to raising the

bar for patentability and increasing the stringency of the

examination process.

Patents are not just the concern of widget-makers.

Software, business methods, financial systems and

other innovations in services are all potentially

patentable, so the service industries have a vital

interest in these reforms.

The deadline for submissions has been extended to the

30th of June, so please make your views known.

Before leaving the topic of regulatory reform, I want to

mention one other breakthrough in my portfolio.

From the 1st of July next year, the states and territories

will relinquish their responsibility for trade weights and

measures to the Commonwealth

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Eight different sets of rules will be replaced with a

single, uniform regulatory regime.

It will be overseen by the National Measurement

Institute.

Once again, some of you may object that the service

industries don’t produce things you can put on a scale

or run a ruler over, but this is only part of the story.

For example, the NMI is also the keeper of Australia’s

atomic clocks and part of the international network that

maintains Coordinated Universal Time – which enables

us to record the chronology of electronic transactions

with absolute accuracy.

Interdependence

This is a useful reminder that however different goods

and services may be, they still inhabit the same

physical, economic and social universe.

They are still inextricably interwoven and

interdependent.

How many activities counted under manufacturing

twenty years ago are counted under services today –

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not because the activity has changed, but simply

because it has been outsourced?

Conversely, how many firms classified as

manufacturers today spend as much of their time on

brand management and logistics as they do on making

things?

The goods sector depends on service sector demand

and inputs, and vice versa.

These may seem like obvious points, but they are

points I believe we forget at our peril.

The global downturn has once again exposed the

danger of relying excessively on any one industry –

whether it is mining in Australia or financial services in

the United Kingdom.

The doctrine of comparative advantage urges us to

specialise in fields of economic activity where our

natural endowments give us an edge.

There is nothing wrong with anyone – nations or

individuals – making the most of assets they were born

with, but I don’t believe we should be limited by them.

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I’m a great believer that nations can create their own

edge.

Comparative advantage may be god-given, but

competitive advantage is something we can build

ourselves.

How?

By investing in innovation, skills, infrastructure and

best-practice regulation – precisely as the Australian

Services Roundtable has proposed, and precisely as

the Australian Government is doing.

This is the key to achieving the economic diversity and

resilience needed to withstand shocks and maximise

prosperity.

Enterprise Connect

It is also the rationale for initiatives like Enterprise

Connect, with its network of manufacturing and

innovation centres around the country – including

centres for creative industries, remote enterprise and

innovative regions.

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Now in its second year, Enterprise Connect has

completed over a thousand business reviews and

awarded around six hundred grants to help firms get

expert advice on how to improve their operations.

The majority of these firms have been in manufacturing,

but it is the skills of the services sector they are drawing

on to become more productive and competitive – skills

in business planning, quality management, market

research and so on.

Services innovation

While I reject the idea that goods are from Mars and

services are from Venus, I do acknowledge that there

are differences between them.

Nowhere is this clearer than in the realm of innovation.

Service industries did 47 per cent of our business R&D

in 2006-07.

Forty-four per cent of firms registered for the R&D Tax

Concession that year were in services, and they

accounted for 36 per cent of the eligible R&D

expenditure.

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Both the share of business R&D and the number of

firms registered for the tax concession were up on the

year before.

This sector clearly has a lot to gain from the new R&D

Tax Credit announced in the Budget.

There will be a 45 per cent refundable credit for

Australian firms turning over less than $20 million, and

a 40 per cent non-refundable credit for larger firms,

including international ones.

This doubles the base rate of R&D support for smaller

firms, and boosts the rate for larger firms by a third.

Companies in tax loss will be able to take the

refundable credit as cash in hand.

The R&D Tax Credit starts in 2010-11.

In the meantime, the government will support smaller

innovative firms in tax loss through the global downturn

by increasing the amount they can spend on R&D and

still be eligible for a tax offset from $1 million to

$2 million in 2009-10.

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We will be talking to industry about how best to

implement the R&D Tax Credit.

Among other things, we need to resolve what will

qualify as eligible R&D.

Once again, if you have views on this, you should make

them known.

While service industries spend significant amounts on

research and development, their share of R&D is

considerably smaller than their share of the economy.

This is because R&D represents only a fraction of the

sector’s investment in innovation – much less than half,

according to the OECD.

Services innovation is typically about developing new

processes, new business models, new ways of

organising, and new ways of communicating.

It is usually driven by what customers, employees and

suppliers want.

This may make it slightly ad hoc, but it also makes it

highly responsive.

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Services innovation is characterised by small,

incremental, non-technical improvements rather than

radical breakthroughs

It is typically achieved by investing in people – training

and skills development – rather than machinery.

It is frequently based on knowledge acquired from

outside rather than developed internally.

It is also incredibly effective.

For example, in 2004 and 2005:

every service industry except communications

outperformed manufacturing in introducing new-to-

the-business innovations

several – including communications – outperformed

manufacturing in introducing new-to-the-industry

innovations

and property and business services tied with

manufacturing for best performance in producing

new-to-the-world innovations.

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Commonwealth Commercialisation Institute

These are great results, but we can and must improve

on them if we are to become more globally competitive.

This is why the new Commonwealth Commercialisation

Institute is so important.

It will receive $196 million over the next four years, with

ongoing funding of $82 million a year thereafter.

The Review of the National Innovation System argued

that innovation support should match “the various

identifiable stages of an innovative firm’s life”.

The new institute will provide that support.

It will speed the commercialisation of ideas developed

by universities and publicly funded research

organisations as well as by private firms – whether

those ideas manifest themselves in products, processes

or services.

It will help innovative companies access the expertise

and capital they need to traverse the valley of death

that stretches between research and revenue.

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Importantly, it will use Commonwealth support as a

lever to prise loose additional private sector investment.

Consultations on the design of the institute begin this

month.

Please get involved.

Powering Ideas

I’ve already mentioned Powering Ideas, the

government’s new agenda for innovation in Australia.

The service industries made a huge contribution to the

development of this agenda through there participation

in the Review of the National Innovation System.

My sources tell me that the expert workshops on

Human Capital and Workplace Innovation and on

Information Policy and Information Markets were

especially fruitful.

Powering Ideas identifies seven National Innovation

Priorities.

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The Australian Services Roundtable has called for

services innovation to be included in the list, but our

priorities do not target particular sectors.

They also differ from the National Research Priorities,

which are concerned with particular research disciplines

and challenges.

No, these are priorities for lifting the capacity and

performance of the innovation system itself.

All of them have a bearing on services, but three in

particular are worth highlighting.

Priority 2 is to ensure that Australia has a strong base

of skilled researchers to support the national research

effort in both the public and private sectors.

Priority 4 is to achieve more effective dissemination of

new technologies, processes, and ideas, with a

particular focus on small and medium-sized enterprises.

And Priority 7 is to get the public and community

sectors working with others in the innovation system to

improve policy development and service delivery.

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Skilled personnel, freer information flows and new

models for delivering services – these are critical to

innovation across the economy, but especially to

people-oriented, knowledge-intensive, service-based

industries like the ones represented here.

Information technology

It is generally true that services innovation focuses on

processes, organisation and marketing rather than

hardware, but there is one very important exception to

this.

No sector relies more on developments in information

and communication technology than this one.

It has been estimated that the rapid uptake of ICT

accounted for a quarter of Australia’s output growth and

a third of labour productivity growth in the nineties.

The effect in service industries like finance and

insurance was even more dramatic, with ICT

investments playing a decisive part in lifting their

productivity growth above the economy-wide average.

Nothing has changed since then.

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The Interim Report on the OECD Innovation Strategy

released last month calls the internet and related

information and communication technologies “arguably

the most important platform for innovation today”.

That’s why we have established a company to invest up

to $43 billion in a National Broadband Network, starting

with a Commonwealth equity injection of $4.45 billion

over the next two years and another $250 million to fix

regional backbone blackspots in 2009-10.

The Australian Services Roundtable has been calling

for action on broadband to support smart services for

some time.

That call is now being answered.

Nor is the National Broadband Network the end of the

story.

We have also renewed National ICT Australia’s funding

so that it can continue its work as our ICT research

centre of excellence.

We are using the new Super Science Initiative to ramp

up Australia’s supercomputing capabilities.

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And I have established a new Information Technology

Industry Innovation Council.

The council is chaired by John Grant, and its members

include IBM’s Glen Boreham.

It will champion innovation within the IT sector and

IT-enabled innovation across the economy.

The future

I love my job whatever it brings, but I don’t mind

admitting that I’ve especially enjoyed the last month.

The Budget included $3.1 billion in new spending on

research and innovation over four years.

The total Commonwealth allocation for research and

innovation will be around $8.6 billion in 2009-10 – up

25 per cent on this year.

That’s the biggest increase and the biggest commitment

on record.

Much of that money will support research in the

physical sciences and experimental R&D in the private

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sector, but a very significant share will go to humanities,

arts and social sciences.

For example, these disciplines will benefit directly from

the extra $615 million we are investing in universities:

to address the indirect costs of research

to increase stipends for research students

and to improve the indexation of research block

grants.

These are the disciplines that help us understand what

makes individuals and societies tick.

They produce critical consumers, active citizens and

creative workers.

No service industry can innovate without them.

And if you don’t have innovative service industries, you

can’t be an innovative nation.

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